Dr. Sven Ufe Tjarks, Fachanwalt für Gesellschaftsrecht

ECJ confirms German Employee Participation Law

By decision dated 18 July 2017, the European Court of Justice (ECJ, case no. C-566/15, Konrad Erzberger/TUI AG) confirmed that the German employee participation laws are compliant with EU laws and in particular with art. 45 of the Treaty on the Functioning of the European Union (TFEU).

Unlike most other countries in the world, Germany has mandatory employee participation rules that cover all sectors of industry and do not distinguish between state-owned and privately-owned companies, but only apply in accordance with the number of staff employed: In the advisory board of a Stock Corporation (“Aktiengesellschaft”) or a Limited Liability Company (“GmbH”) with more than 500 employees one third of the members, and in case of more than 2,000 employees half of the members, have to be elected by the employees of the company among their fellow employees or, with certain limits, among union representatives. In a group of companies, the employees of all group companies are added up to determine whether and to what extent such employee participation should apply to the advisory board of the top holding company.

As the German law is applicable only to companies with registered seat in Germany, until the ECJ decision dated 18 July 2017 it was much discussed how to apply the above rules in a multinational group of companies. The plaintiff had argued that by allowing only employees of German group companies to elect and be elected to the advisory board of the top holding company, the laws on employee participation violated art. 45 TFEU by discriminating employees because of their nationality and impeding the freedom of movement for workers in the EU.

The ECJ did not see any discrimination and stated that the freedom of movement for workers granted in art. 45 TFEU does not guarantee an employee making use of this freedom to find the same social and working conditions in the member state of destination as in the member state of origin. Therefore, even the fact that according to the German law an employee holding a seat in the advisory board of a German company may be forced to give up this seat when moving to another member state for an employment with another group company does not give rise to a violation of art. 45 TFEU.

The ECJ decision clarifies the legal situation in multinational groups of companies and confirms that the German law on employee participation, as it is construed by the courts in Germany, is compliant with EU laws.

Whether the German model of employee participation in general is a good thing or not is a matter of discussion since the 1960s. So far it does not seem to have done great harm to the German economy. Nevertheless, usually shareholders are not particularly fond of sharing control over the company with the employees. Therefore, it is good to know that German Stock Corporations or large GmbHs wanting to avoid the employee participation in the advisory board despite fulfilling the criteria, in particular having the relevant number of staff, have a recently quite popular escape: the change of the company form into a Societas Europea (SE). As long as the relevant number of staff is not yet reached or with the consent of their employees, companies changing into the form of an SE may opt out of the German employee participation system.

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